Research On Mechanisms To Mitigate The Information Asymmetry Problem In Loan Securitization: Risk Retention And Reputation Incentive

At the beginning of 2007,American real eastate price bubble bursted and Subprime securitization market collapsed,which eventually led to the global financial crisis.The outbreak of the crisis reflects serious information asymmetry problem in the loan securitization market.On the one hand,investors cannot observe the banks' due diligence and supervision effort,there is information asymmetry between banks and investors.On the other hand,securitization transfers the credit risk of loans,resulting in banks' earnings not related to loan performance.Then,banks may put low-quality loans into asset pool of securitization and relax screening criteria and reduce supervision effort,which induces adverse selection and moral hazard.How to alleviate the information asymmetry problems in the loan securitization market has become a hot tipic.Mechanisms to mitigate the information asymmetry problem in loan securitization have attracted scholars' and regulators' attention.Risk retention links banks' earnings with the credit risk of securitized loans,so it is considered to be an effective mitigation mechanism.After the crisis,US.EU and Chinese regulators have introduced minimum risk retention requirement for securitization sponsors.However,current minimum risk retention requirements lacks flexibility,which may cause potential costs:weakening bank benefits brought by loan securitization,reducing the efficiency of signaling of risk retention,and declining the credit supply in the recession.Regulators may consider introduce more flexible regulatory requirements.Reputation incentive,as a market constraint,can also alleviate the adverse selection and moral hazard in the loan securitization.Compared to mandatory regulatory requirements,reputation incentive may not reduce the market efficiency,but also has limitations.Research on the existence of effect of reputation incentive and the factors that have infulences on reputation incentive's mitigation effect,could provide the reference for regulatory to make more flexible risk retention requirement,which takes risk retention and reputation incentive's complementary function into consideration.This paper describes how risk retention mitigates information asymmetry problem and its potential costs,the effect and limitations of reputation incentive alleviating the agency problem,and then put forward the idea that risk retention and reputation incentive could complement with each other.Based on theoretical analysis,this paper uses the quarterly data of US bank holding companies from second quarter of 2011 to the fourth quarter of 2016 to test the effect of risk retention mitigating information asymmetry problem.The empirical results show that risk retention has incentives for banks' action and the risk retention requirement has practical meanings.However,risk retention may also cause potential costs,reputation incentive,as a market constrain,could complement risk retention.This paper uses the quarterly data of US bank holding companies from second quarter of 2001 to the fourth quarter of 2006 to test existence of the effect of reputation incentive and the factors that have infulences on reputation incentive's mitigation effect.The empirical results show that securitized loans of high reputation bank have lower default rates,the effect of reputation incentive exists.The effect of reputation incentive is affected by the degree of market competition and the banks' financial condition.When the market competition is moderate and the banks' default risk is small,the function of reputation incentive is better.Finally,based on the analysis of the quality of underlying assets in domestic loan securitization projects and the evolution of domestic regulatory rules on minimum risk retention requirements,taking the mechanism explanation and empirical analysis into cinsideration,this paper puts forward some suggestions for domestic regulators on how to develop more flexible regulatory requirements.